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Blockbuster tells Hollywood studios it's preparing for mid-September bankruptcy

BlockbusterStore1 After dominating the home video rental business for more than a decade and struggling to survive in recent years against upstarts Netflix and Redbox, Blockbuster Inc. is preparing to file for bankruptcy next month, according to people who have been briefed on the matter.

Executives from Blockbuster and its senior debt holders last week held meetings with the six major movie studios to discuss their intention to enter a “pre-planned” bankruptcy in mid-September, said several people familiar with the situation who requested anonymity due to the sensitivity of ongoing talks.

Blockbuster is hoping to use its time in Chapter 11 to restructure a crippling debt load of nearly $1 billion and escape leases on 500 or more of it 3,425 stores in the U.S. Maintaining the support of Hollywood's film studios during the process will be critical so that Blockbuster can continue to rely upon an uninterrupted supply of new DVDs.

Blockbuster has lost a total of $1.1 billion since the beginning of 2008 and has been severely hamstrung in efforts to grow its business due to interest payments on $920 million in debt. Earlier this month the company announced that most of its debt holders had agreed to a forbearance on interest payments until Sept. 30, during which time it would attempt a recapitalization.

Last week Dallas-based Blockbuster's chief executive, Jim Keyes, came to Los Angeles to hold individual meetings with executives at studios including 20th Century Fox, Paramount Pictures, Sony Pictures, Universal Pictures, Walt Disney Studios and Warner Bros. He was joined by a team of restructuring consultants hired to help turn around the struggling company, along with its senior debt holders who would likely end up owning a substantial portion of Blockbuster following bankruptcy.

Former Sony Pictures home entertainment president Ben Feingold, who is serving as an advisor to the debt holders, was present as well.

Though its plans are not yet set in stone, people knowledgeable about the discussions said the Blockbuster representatives presented a mid-September bankruptcy as the most likely scenario. It would enter what is known as a “pre-planned bankruptcy,” meaning most but not all creditors would be on board ahead of time, including senior debt holders and content suppliers.

One of the primary goals of the bankruptcy process, which the company said it hopes would last about five months, would be to escape costly leases for some of its worst-performing stores. Though Blockbuster hasn’t decided exactly how many locations it would seek to shutter as part of a bankruptcy, executives told the major studios it is looking at between 500 and 800.

Blockbuster closed nearly 1,000 stores in the last year alone, a reflection of consumers’ rapidly declining interest in renting DVDs from retail locations now that they can rent them from ubiquitous kiosks in grocery stores, in the mail, or via the Internet.

If it successfully exits bankruptcy, Blockbuster has told Hollywood studios, it hopes to grow through non-retail initiatives. Kiosk manufacturer NCR Corp., for instance, has already deployed about 6,000 Blockbuster-branded kiosks that, like Redbox, rent DVDs for $1 per night.

The company also hopes to expand its presence in the still nascent digital distribution space, through which a growing number of customers are downloading or streaming movies on computers, Internet-connected televisions, and mobile phones.

Most studios are believed to be supportive of Blockbuster’s efforts, as they want to see it remain in business as a viable competitor to Netflix and Redbox, particularly since the formerly second-largest DVD rental store, Hollywood Video parent firm Movie Gallery Inc., went out of business in April.

But there are still some issues to be resolved, including the company’s desire to continue offering movies from all the studios on the same day they go on sale. Fox, Universal and Warner have all instituted a 28-day window on rentals through Redbox and Netflix.

The studios would likely be protected from any significant losses on payments Blockbuster might owe them at the time it files for bankruptcy under the proposed plan. But they would lose revenue from any stores shut down.

The parties most impacted would be Blockbuster’s junior debt holders and the landlords of leases that would be canceled under the proposed bankruptcy. It remains to be seen whether they would attempt to challenge a plan that left them with a fraction of what they are owed.

If the company does not enter bankruptcy, it would need to find a new investor or convince its debt owners to significantly reduce its interest payments for the foreseeable future.

A Blockbuster spokeswoman declined to comment on the studio meetings. In a statement, she said, “The extension of our forbearance agreement is a strong sign of support from our senior secured noteholders as we work toward putting in place a more appropriate capital structure to support Blockbuster’s long-term growth. … Our discussions continue to be productive and we have every reason to believe we will come out of the recapitalization process financially stronger and more competitively positioned for the future.”

Blockbuster stock, which last month was delisted by the New York Stock Exchange because of its ongoing low price and moved to the over-the-counter market, closed Thursday at 11 cents. The company’s total market value is $24 million.

In 1994 it was acquired by former owner Viacom Inc. for $8.4 billion.

--Ben Fritz

Photo: A Blockbuster store in Dallas. Credit: Ron Heflin / Associated Press

Comments () | Archives (121)

Well, I done love Blockbuster, but don't hate it either (although I confess, I always thought of them as "Lackluster Video"), but I agree with the more virulent commenters here that their customer service was abysmal and fees, especially late fees, ridiculously high.

Short-term gain instead of long-term stability: this ultimately self-defeating business plan destroys yet again. Every entrepreneur everywhere take note.

KARMA !! Blockbuster gobbled up the smaller businesses who actually cared about customer service and then did everything they could to rip off customers. Blockbuster is one of the most bloodsucking retailers out there. Bankruptcy won't save them and I bid them GOOD RIDDANCE with everyone else.

What really grinds me though, is that the movie studios and the people who own the content that netflix has are trying to push blockbuster back into business as opposed to moving along the innovation and helping out redbox and netflix. Remember, 2 studios signed a 28 day moratorium over giving netflix and other services access to the newest movies while those same studios gave preferential treatment to BB; claiming that it was to increase dvd sales. Which BTW, did not occur and that did not do anything. As a netflix subscriber, though it does not crimp my style with netflix, i would wish that movie studios not giver preferential treatment to out-dated business models.

Wow. So much emotion about a company. It's not Enron for Pete's sake. It's a movie rental company that got saddled with a huge debt after Viacom sucked the cash out, spun them off and spit them out with $1 billion in debt. I doubt that very many corporations could even make the debt payment, let alone stay in business. Let's just see what happens.

Blockbuster does not stand a chance even if it can somehow restructure its debt. It has been a second-mover copycat in its industry for too long and the company treats its customers and stakeholders like dumb fools. The truth is that the customers and stakeholders are smart and know that Blockbuster is irrelevant. Liquidation, not bankruptcy, is inevitable for Blockbuster and it is clear that is what society wants. I hope Blockbuster's few remaining investors finally pull the wool from their eyes, see what a lost cause Blockbuster has become, and take the company down for good.

I how I miss the days of returning a DVD on time only to be charged a late fee because the clerk didn't log the DVD into the system until the next day.

Since getting Netflix over a decade ago, I haven't set foot into a video rental store.

If BB was smart they would close the rest of their stores and concentrate on by-mail and the kiosks. Their by-mail service is getting better lately but it's too little too late, Netflix has a better service with instant watch.

I heard that in 1998 there was a Dallas based Telecom Scientist who designed and built a fiber optic data network in University Park that provided fully interactive voice, video and data services directly to the home.

That same guy went to Blockbuster's corporate office to garner their interest in a new delivery system with video on demand and a low cost set top box capable of storing and streaming live video and games.

From what I heard, they laughed him out of the meeting and said they were going to do a deal with Enron instead. (ENRON....it doesn't get any better than that!)

Last I heard, this guy created something called the World Wide Array which is going to allow us to connect to a global distributed supercomputer from the Internet. (Kinda cool...keep ya posted!)

What makes me laugh about this story is the idea that Blockbuster showed this guy the door for believing that the Internet was going to be the place for voice, video, and data services. You snooze, you lose! (I wonder if Facebook was rejected by Blockbuster for being to new fangled...)

I have been boycotting Blockbuster ever since 1998 when they sent my name to a crediting agency for $15. Considering that I spent about $500 a year renting videos (I am a high-volume renter) I figure that has cost them about $6,000. This little credit blemish has now disappeared from my record. Other video stores just ask you to pay your late fees so you can rent again. It is good to see that I wasn't the only person turned off by their aggressive tactics. Good riddance. I hope they don't survive bankruptcy.

Only BB management would be so stupid as to design a business model to make a majority of their profits based on late fees. Glad I shorted the stock! Go NFLX and CSTR (Redbox)!

Working at Blockbuster part time for 7 years it saddens me to see the anger at the poor service we delivered to so many people. Sorry to everyone affected. Not all employees we as unhappy and unfriendly as the stories I have read here.

The comments about fees has been intriguing because Redbox charges the exact same fee as Blockbuster, $1 per day, yet Blockbuster fees are considered unwarranted. Many people never pay fees, some elect to keep their movies additional days and pay fees, while others have unplanned fees when they keep movies longer than planned. Any way you look at it the fee is up to the consumer and responsible consumers never seem to complain about the fees.

I agree that Blockbuster has not been a good corporate citizen, but overall its been a good place to work.

Goodbye Blockbuster! All I can say is, it's about time! I have boycotted BB since 1999 when they repeatedly tried to charge me late fees for movies I had returned to their drop box before closing. Somehow it was my fault that their night employees were too lazy to check the box at closing time. On my last visit there I told the manager he could keep my card and I've never looked back.

USA DAVE : "look under your couch " really... that is your answer to Blockbuster's
failed business model ?

Good riddance Blockbuster, US Postal Service....you are next !

I've been going to my local SoCal (South Bay) BB for a couple of years and have never, not once had any problems. The young staff is always super nice and personable. I never return the DVDs late so I never had to shell out any late fees. The staff not only gets paid an insulting minimum wage and have to wear ugly uniforms but on top of that they get chewed out by rude customers who complain about having to pay these fees. (how about some personal responsiblity, folks?).

My beef is with the company, not the staff. Like most corporations they put profit before people (staff and customers) and it comes back to bite 'em in the butt.

I worked for a large Tower Records for a mercifully short time before they went under in 2006. and hated it. They were completely clueless about what customers wanted which was primirily human interaction and an interesting shopping "experience". They basically chained the cashiers to the (ancient) registers so we couldn't go out and help customers on the floor.

If people didn't care about human interaction they'd shop online, I truly believe this. But we're getting lazier by the minute - soon we'll all be at home in front of our computers ordering everything online, zombies who've forgotten what it feels like to talk to other people.

I applied online at a BB two years ago and was mortified: a phychological profile type of application with page after page of insane questions put together by a company who probably recuits for the FBI too. The Qs were designed to weed out applicants who might not provide top notch customer service but came off as trick Qs that made my jaw drop more than once. Some of them were totally irrelevant and comical. Q: If a customer throws a fit, do you A) Punch him/her. B) Smile C) Call a manager D) All of the above. Yeah, okay, I'm half-kidding but you get the idea. Borders and other companies have the same type of online application process. I answered the many Qs the way I knew they would want me to - I'm a smart cookie - but never heard back. Thank God.

I'm sorry for the thousands of people who will lose their jobs - that's they last thing we need in the economy. But - depite having had a good experience myself at my local BB, I do agree overall with the comments that BB did not understand how to run a business. I too am sure that corporate management will probably get some nice final paychecks unlike the store staff at the bottom of the food chain.

P.S. I hate Red Box and Net Flix - will never rent except at a store. Don't want to be a zombie at home. It's bad enough I'm typing this on my computer. What's the world coming to?

"The only question to ask yourself is, how much are you willing to sacrifice to achieve this success?" --Larry Flynt

All they need to do is start renting porn DVDs (not at the store, but via mail and online)...

Oops - that was supposed to be "psychological".

And with this, lets bid a farewell to those people working at block buster and people in the supply chain loop and more property going on "For Lease".

I am going to laugh at all of you guys when Netflix doubles your monthly fees because they no longer have any competition.

I switched my acount from Netflix to Blockbuster and am very very happy I did, I should have done it a year ago. Before doing this I haven't entered into a video store for over 1 year. It was so nice to be able to take my wife and son out to dinner and then to Blockbuster Store to WALK AROUND AND PICK A DVD, Yah how weird we actually got off our sofa and spent some time browsing in person. I hope Blockbusters does not close any stores, all this on line, mail stuff is great but its getting old. Something simple like getting out of the house to go rent a dvd is coming back. From when I opened my account at Blockbuster till now I see more and more people going back to the video store, especially families.

Went to Netflix 2 yrs ago and made the best choice ever. Tore up B.B. card.

They want out of the leases. Close the Brick and Mortor locations, consolidate to warehouses, sell the inventory to the public and dissolve. Or Close the Brick and Mortor and start doing what Netflix does out of central clearing houses. Just the elimination of the real property leases and staff will bring their debt load a significant amount. So how many people will end up being lay'd off from this restructing? Several thousand I am sure and a significant amount of upper management as well. Yep the recession is over and employment is recovering!

Netflix is the single best investment a home video consumer could ever make. With their streaming service (I've seen three movies that just came out very recently in theaters through this service--THE ECLIPSE, LA MISSION, and FINDING BLISS) and huge DVD library (with even the most obscure/foreign stuff) it's totally worth either the 10, 15, or 20 bucks a month. Blockbuster always had such a horrendous selection that usually just included recent fare, but no classics or any foreign hardly at all.

I agree, Blockbuster policies are only to blame. I initially signed up to receive their DVDs on the mail, they had the UPPER HAND on Netflix because you could return them both through mail or exchange them instantly at any store! It was a significant better deal that Netflix couldn't match! But they soon started putting all kinds of restrictions and raising fees, while Netflix kept getting better by offering FREE STREAMING movies through Xbox or online ... and that was the end of Blockbuster mail program. As far as their stores, DVDs are so cheap now, yet their rental prices are still around $5, about 25% of their cost ... way over priced

No tears here! You choose to be greedy with your ridiculous fees now I find myself rooting for netflix to destroy you! Blockbuster must and will fail, because we know already how they behaved when they were the leaders in their industry.

The only ones sadder about this than Blockbuster are the studios. They all hate and fear Netflix and are willing to prop up Blockbuster as 'competition'. But even if BB has the product, no one wants to use their services... Yet another failure on the part of Hollywood.

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